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Corporate Sector

Summer Exam-2016

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Pakistan Institute ofPublic Finance Accountants


BusinessEconomics

(Level-2)



Solution EconomicsSummer Exam-2016

Ans.1.(a)

Opportunity Cost:The value of the next best alternative which is sacrificed to attain something is calledopportunity cost. i.e. cost of next best alternative forgone.

Examples:(i) The opportunity cost of buying a car, is what else that money could have bought.

(ii) The opportunity cost of deciding not to work, is the forgone wages that could havebeen earned.

03

(b) Applications of Opportunity Cost to Households , Firms and Government:Opportunity costs can be applied to all of the agents that we have discussed so far in anumber of different ways.

Households:Households are the collective group of individuals not only consuming goods andservices, but also providing labor for firms. The opportunity cost for households is thesatisfaction foregone by consuming Good A rather than spending the money on Good“B”.

Firms:Firms are the collective group of organizations producing goods and services in aneconomy. The Opportunity cost of firms is the revenue foregone by using productiveresources to supply Good “A” rather than using them to supply Good “B”.

GovernmentsThe opportunity cost is the social needs forgone by using resources to provide Service“A” (e.g. education) rather than Service “B” (e.g. health).

07

Total Marks 10

Ans.2.(a)

Cross Elasticity of Demand:A measure of the responsiveness of demand for a good A in relation to a change inprice of B.

Cross Ed=

02

(b) Competitor’s Price Demand for Khan’s GameRs. 650 10,000Rs. 550 8,000

Cross Ed between Khan’s and competitor’s game

=∆ ÷ ∆ = , ÷ = , × = 1.3

Cross elasticity between Khan’s and competitor’s games demand is 1.3 (Greater than 1)

08

Total Marks 10




Ans.3.(a)

Indifference Curve:It is a curve that shows the different combinations of two goods which give the samelevel of satisfaction.

Reason of Convexity of ICIn this instance, convexity means being bowed to the origin. The shape of the curvehas to do with how much of one good does a consumer want to exchange for anotherin order to maintain the same level of utility. Suppose a consumer has a high level ofGood A, and a low level of Good B. In order to reduce his consumption of Good B,and maintain the same utility, he would need to consume even more units of Good A.This is why Indifference Curves are convex to the origin.

06

(b) Budget of Mr. Javed=100

Price of X= Rs.20 per unit

Price of Y= Rs.10 per unit

The maximum of X which Mr. Javed can purchase = = 100/20 = 05 units

The maximum of Y which Mr. Javed can purchase = = 100/10 = 10 units

Due to increase in income from Rs.100 to Rs.200, the Budget line will be shiftedoutward.

04

Total Marks 10


Ans.3.(a)



06







04

Total Marks 10


Ans.3.(a)



06







04

Total Marks 10




Ans.4.(a)

Price discrimination:Price discrimination is a microeconomic pricing strategy where identical or largelysimilar goods or services are transacted at different prices by the same providerin different markets. Discount in fee and concession to soldier families in joy land arethe examples of price discrimination. i.e. Charging different prices for the sameproduct with different persons, places or times.

04

(b) Super Normal Profit of Allied Private Limited:

Shaded Area = Super Normal Profit or Abnormal Profit

Total Revenue = PROQ

Total Cost = CTOQ

Profit = PRCT

Allied Private Limited is earning super normal profit

06

Total Marks 10

Ans.5.(a)

Marginal Propensity to Consume (MPC):It is the ratio of change in consumption to change in income. It is slope or gradient ofchange in consumption w.r.t. Change in Income.

MPC =∆∆

Marginal Propensity to Save (MPS):It is the ratio of change in Saving to change in income level. It is slope or gradient ofchange in savings with respect to change in Income.

MPS =∆∆

04

(b) Multiplier Effect:

The number by which a change in investment must be multiplied to result in the finalchange of total output.

K=∆∆

Multiplier in open economy= = . . . =1.67

06

Total Marks 10




Ans.6.(a)

Direct Tax:A Tax paid directly to the Government by the person on which it was imposed. Themain example of this is income tax. From a government’s perspective, the followingare the advantages of Direct Tax. Examples are Property Tax, Wealth Tax and CapitalGain Tax.

Advantages:

Cost of collection is low:Meaning it is an economical way of raising revenue, and saving expense.

Relative certainty:The Government can estimate how much it will receive allowing better planning ofprojects.

Flexible:If a government needs to raise revenues quickly, it can do so by raising Direct Taxes.

05

(b) Fiscal policy:

Policies undertaken by a government to influence macroeconomic conditions, andtherefore economic activity, through the use of taxation and spending.

The main objectives of fiscal policy are:

1. Keep Inflation Low

2. Keep Employment High

3. Steady Economic Growth

4. Equilibrium in Balances of Payments

05

Total Marks 10

Ans.7.(i)

Gross Domestic Product (GDP)GDP= C+I+G+(X-M)=20, 500 + 4,920+ 8,000+(7,450-6,340) =Rs. 34,530 million

03

(ii) Gross National Product (GNP)GNP= GDP+ Net Foreign Income= 34,530+ 1,500 = Rs. 36,030 million

02

(iii) Net National Product. (NNP)NNP= GNP- Depreciation of capital= 36,030-1,830 = Rs. 34,200 million

02

(iv) GDP at Factor CostGDP at factor cost = GDP at Market Prices – Indirect Tax + Subsidies= 34,530-3,260+500 = Rs. 31,77 million

03

Total Marks 10




Ans.8.

(a)(i)

Open Market Operation:

The Central Bank can buy or sell Government Securities on the open market, tochange the level of reserves that are held by Commercial Banks. This action ofCentral Bank is called Open Market Operation.

02

(ii) Change in Reserve Ratio:

Every Commercial Bank has to keep reserves to meet the cash demand of depositors.In order that the reserves are kept safe, Commercial Banks will have them depositedat the central bank. This minimum reserve ratio is fixed by Central Bank. Bymanipulating this Reserve Central Bank controls the money supply and aggregatedemand.

02

(b) Suggestion to correct the current Account Deficit

1. Deflation: By bringing down the price level domestically, this can increasethe attractiveness of goods on the international market, thereby increasingexports.

2. Exchange control: In an extreme version, a monetary authority maycommand that exporters relinquish foreign exchange reserves to the centralbank. This has the effect of restricting the level of imports that are possible.

3. Tariffs: These are duties placed upon imports. This directly increases theprice of imports, making them less attractive to the domestic market. This alsogives domestic suppliers more protection to increase the supply of their owngoods.

06

Total Marks 10

Ans.9.

(a)(i)

Common Stock:

An instrument issued by companies that can be obtained via the primary or secondarymarket. Investment in the business means part-ownership of the company, and alsorights and privileges – such as voting power, and the ability to hold a position. Aninvestor in debt is entitled to interest payments; the equity holder may or may not bepaid dividend, depending on the company’s policy. There is a high risk factorinvolved, as the price of the stock can fluctuate greatly. Holders of the instrumentrank at the bottom of the scale if the company were to go into liquidation.

03

(ii) Preference Shares:

An instrument issued by companies that rank higher than common stock in terms ofscale of preference. They possess the same characteristics as equity in that its value isbased upon the share price fluctuating. However it also acts similar to debtinstrument, in those dividends are fixed, and the holder does not hold any votingrights. In case of liquidation of a company, preferred shared are preferred overcommon stocks.

03

(b) Commercial Banks create credit through advancing loans. The capacity of their creditcreation depends upon the money or credit multiplier. And the credit multiplierfurther depends upon the reserve ratio.

The multiple of credit that can be created by an initial deposit is:Money multiplier=1/RR

04




Reserve Ratio:The portion of depositors’ funds that a bank must keep for immediate delivery to itsowner. The greater the reserve ratio, the lesser will be the amount of credit created bythe commercial banks. And the lesser will be the reserve ratio, the greater will be theamount of credit. There is inverse relation between Reserve Ratio & Credit Creation.

For example if initial deposit is Rs. 100 and RR is 10%, then

Total credit creation= 1/10% * 100= Rs. 1000

And if reserve ratio increases to 20% then

Total Credit creation=1/20% *100= Rs. 500

Total Marks 10

Ans.10.(i)

Foreign Exchange Rate

The foreign exchange rate is the price of one currency expressed in terms of anothercurrency.

02

(ii) Demand for Money

Total amount of money which people prefer to hold in cash or liquid form is calleddemand for money.3 Motives are Transactionary Motive, Speculative Motive andPrecautionary Motive.

02

(iii) Balance of Trade

It is the difference between the monetary value of exports and imports of tangiblegoods in an economy over a certain period, measured in the currency of that economyA positive balance is known as a trade surplus and negative is trade deficit.

02

(iv) Consumer Credit

A Consumer Credit agreement often occurs between a retailer and a consumer. Inexchange for store credit (i.e. currency to spend at the establishment) a consumer canpay the amount back over a certain period of time.

02

(v) Capital Market

The Financial Market which is largely used to raise long-term finance (more than ayear) and capital is called Capital Market. There are a number of different instrumentsthat can be bought or sold. These broadly fit into two categories: Debt and Equity.

02

Total Marks 10

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BusinessLaws

(Level-2)



Solution Business LawsSummer Exam-2016

Ans.1.

Alternate Dispute Resolution is any type of procedure of combination of proceduresvoluntarily used to resolve issues in controversy, other than court based adjudication.e.g. Mediation, Conciliation, Arbitration.

02

Advantages of ADR

i) Speedy.Arbitration is often faster than litigation in court.

ii) Cheaper and FlexibleArbitration can be cheaper and more flexible for businesses.

iii) Privacy.The public and the press have no right to attend a hearing before an arbitrator.

iv) Appeal.In most legal systems, there are very limited avenues for appeal of an arbitralaward.

v) Service of an expert.The parties may choose the person who is an expert in the particularcommercial field that they are in to settle their dispute.

(one mark each for any three correct answers)

03

Disadvantages of ADR

i) AppealLimited Avenue for appeal means that an erroneous decision cannot be easilyoverturned.

ii) Expensive.in countries where the cost of court action is not so high this might be moreexpensive to go to arbitration.

iii) Application of law.Rules of applicable law are not necessarily binding on the arbitrators, althoughthey cannot disregard the law.

iv) Delay.When there are multiple arbitrators on the panel, manage their schedules forhearing dates in long cases can lead to delays.

(one mark each for any three correct answers)

03

Total Marks 08




Ans.2.(a)

Baber can recover the amount of water charges as this is quasi contract situation aspayment by interested person as discussed below.

Payment by interested personA person, who is interested in the payment of money which another is bound by lawto pay, and who therefore pays it, is entitled to be reimbursed by the other.Thus the essential requirement of the section is:

The payment made should be bona fide for the protection of one’s interest.

The payment should not be a voluntary one.

The payment must be such as the other party was bound by law to pay.

0101

01

01

01

01

(b) Differences between contract of indemnity and contract of guarantee.

S. No. Contract of indemnity Contract of guarantee

1. Number of partiesThere are two parties, indemnifier andindemnity holder.

There are three parties, principaldebtor, creditor and surety.

2. Number of contractsThere is only one contract. There are three contracts.

3. Object.The indemnifier undertakes to save theindemnity holder from any loss.

The surety undertakes for thepayment of debts of principaldebtor in case of his default.

4. Nature of liabilityThe liability of indemnifier is primary andunconditional.

The liability of surety issecondary and conditional andco-extensive.

5. Commencement of liabilityThe liability arises only on the happening ofa contingency.

The liability arises only on thenon-performance of an existingpromise or non-payment of anexisting debt.

6. Right to sueThe indemnifier cannot sue a third party inhis own name because of absence of privityof contract between him and third party.

A surety, on discharging the debtof principal debtor, can sue theprincipal debtor in his own name.

(1.5 mark for each correct identification with maximum of 06 marks)

06

Total Marks 12




Ans.3.(a)

i) Wrong 0.75ii) Correct 0.75iii) Wrong 0.75iv) Wrong 0.75v) Wrong 0.75vi) Correct 0.75vii) Correct 0.75viii) Wrong 0.75

(b) Following are the cases where suit for specific performance is not maintainablewhere:

Monetary compensation is considered as an adequate remedy. Contract is of personal nature, e.g. contract of services. Court cannot supervise the performance of the contract e.g. construction of

building. One of the parties is a minor. Contract is inequitable to either party.

(one mark for each correct answers with maximum of four)

04

Total Marks 10

Ans.4.(a)

Yes supplier can sue all three partners jointly or sue B alone.

Every partner is liable jointly with all the other partners and also severally meansseparately, to third parties for all acts of the firm done while he is a partner. The thirdparty may take legal action for non-payment of a debt or losses incurred as a result ofa breach of contract against.

All the partners jointly, or Any individual partner A, B or C

If supplier chooses to sue B personally, and succeeds with his claims, B will berequired to pay the supplier. It will then be for B to obtain from his partners A & Ctheir share of the liability that they now owe. i.e. he will recover Rs. 50,000 each fromA & C.

02

01

0101

0101

(b) The mandatory duties of a partner that cannot be changed by an agreement are;

i) Duty to be just and faithful.ii) Duty to carry on business to the greatest common advantage.iii) Duty to render true accounts.iv) Duty to provide full information.v) Duty to indemnify for loss caused by fraud.vi) Duty to be liable jointly and severally.vii) Duty to act within authority.viii) Duty in case of emergency.

(0.5 mark for each correct answer with maximum 03)

03




(c) Where a partner has died or has ceased to be a partner by retirement, expulsion,insolvency or any other cause, the surviving or continuing partners may carry on thebusiness with the property of the firm without any final settlement of accounts asbetween them and the outgoing partner. In such a case in the absence of a contract tothe contrary, legal representative of the deceased partner or the outgoing partner, isentitled at his option to:

Such share of the profits as in proportionate to his share in the property of thefirm or

Interest at the rate of 6% on the amount of his share in the property of the firmprovided continuing partners do not settle accounts.

01

01

1.5

1.5

Total Marks 15

Ans.5.(a)

Bela will have to bear the loss as discussed below.

Where there is an unconditional contract for the sale of special goods in a deliverablestate, the property in the goods passes to the buyer when the contract is made, and it isimmaterial whether the time of payment of the price or time of delivery of the goods,or both, is postponed. It is a case of bailment as well.

01

010101

(b) Subject to the provisions of this Act and of any law for the time being in force,notwithstanding that the property in the goods may have passed to the buyer, theunpaid seller of goods, as such, has by implication of law.

a) A lien on the goods for the period while he is in possession of them,b) In case of the insolvency of the buyer a right of stopping the goods in transit

after he has parted with the possession of them.c) A right of re-sale.

where the property in goods has not passed to the buyer, the unpaid seller has, inaddition to his other remedies, a right of withholding delivery similar to and co-extensive with his rights of lien and stoppage in transit where the property has passedto the buyer.

01

0101

01

0101

Total Marks 10

Ans.6.(a)

Raja and Rehan should apply to Commission to get registered and work as a limitedliability company without using the word limited.

Restrictions Such Association shall apply its profits, if any, or other income in promoting

its objects, and

Such Association shall prohibit the payment of any dividend to its members.

01

01

01

Privileges and benefitsThe association shall on registration enjoy all the privileges of a limited companyand be subject to all its obligations, except those of using the word or words“Limited”, “(Private) Limited” or “Guarantee) Limited”, as the case may be, aspart of its name.

01




(b) Such association may be set up for any of the following purposes.

Commerce, Art, Science, Religion, Sports, Social services, Charity or Any other useful object.

(0.5 mark for any six correct answer)

03

(c) Zee Foods Limited can change its name by passing a special resolution and obtainingwritten permission of the registrar for the new name.

02

Upon the change of name, the registrar shall enter the new name on the register inplace of the former name and shall issue a ‘Certificate of Incorporation on change ofname’. On the issue of this certificate, the change of name shall be complete.

02

After the change of name, the former shall also be mentioned for one year from thedate of issue of the certificate outside every office or place of business of the companyand on every document and notice of the company.

02

The change of name shall not affect any legal proceedings that might havecommenced by or against the company under its former name. It would also not affectthe rights and obligations of the company.

02

Total Marks 15

Ans.7.(a)

The books containing the minutes of proceedings of the general meetings shall beopen to inspection by members for at least two hours on each day without chargeduring the business hours.Members of the company can demand a certified copy of the minutes of generalmeeting which the company shall provide to him within seven working days of receiptof his request.

02

02

(b) Directors shall exercise the following powers by ‘passing a resolution I boardmeeting:

To call the uncalled an unpaid share capital of the company. To issue shares, debentures or other redeemable capital or to otherwise borrow

money or invest the funds of the company. To make loans, provided in case of banking companies , the acceptance of

deposits and other amounts from account holders and placements of own fundsin other banking companies shall not be considered as incurring or making of aloan.

To approve annual and periodical accounts and to approve bonus foremployees.

06




To incur capital expenditure exceeding or undertake leasing obligationsexceeding Rupee one million or to sell/dispose of assets having book valueexceeding Rupees one hundred thousand.

To undertake leasing obligation exceeding one million rupees. To declare interim dividend. To authorize any of the following for entering into transactions with the

company.

Director of the company. Partnership firm in which director of the company is a partner. Private Company in which director of the company is a director.

If the amount is material as per generally accepted accounting principles. To write off bad debts. To write of inventories and other assets.

(one mark for each correct answer with maximum of 06 marks)

Total Marks 10

Ans.8.

(i)

First Chief ExecutiveDirectors shall appoint first chief executive within fifteen days of the date ofincorporation or right on the day of commencement of the business whichever isearlier.

First Chief Executive can be appointed for a period of maximum up to the first AGM.He may earlier resign or be removed from his office.

010101

01

(ii) Removal of Chief ExecutiveChief Executive can be removed through any of the following modes at any point intime regardless of any provisions in the articles of association or in his appointment tothe contrary.

by passing a special resolution in general meeting of the company or by passing a resolution of board of directors with there at least three fourth

majority of the directors.

01

1.51.5

(iii) Company is required to file all special resolutions passed by it with the registrar. Thecompany shall file all the special resolutions passed by it within fifteen days ofpassing the same with the registrar. Such copy to be filed shall be authenticated by theChief Executive or Secretary of the company.

0101

01

Total Marks 11




Ans.9.

(i)

Private CompanySuch type of a company can be registered by at least two members and it restricts.

The maximum number of members to fifty, members jointly holding sharesshall be counted as one member,

The right to transfer the shares by its members, The invitation of subscriptions from general public for its shares or other

securities.

01

01

0101

(ii) Public Unlisted CompanyPublic Unlisted Companies have not made an offer of their shares to general publichence there shares are not traded on a Stock Exchange.

A Public Unlisted Company however is entitled to make an offer to the general publicas and when it thinks fit unlike private companies which are forbidden to invitesubscriptions from general public.

02

01

(iii) Holding companyIt means a company or body corporate which holds (directly or indirectly) more thanfifty percent (50%) in the voting securities of any other company, or has a power toelect and appoint majority of the directors of such other company.

0101

Total Marks 09

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CostAccounting

(Level-2)



Solution Cost AccountingSummer Exam-2016

Ans.1. Current Sales Turnover Rs. 600,000 01

Selling price per unit Rs. 10 01

Current Sales volume in units(Rs. 600,000\Rs. 100) 6,000 units 01

Present Capacity utilization 60% 01

Sales Volume at 100% capacity (6,000 x 100/60) 10,000 units 01

Current selling price per unit Rs. 100 01

Less: Proposed reduction @ 20% Rs. 20 01

Proposed selling price per unit Rs. 80 01

Variable cost per unit Rs. 20 01

Add: Variable cost included in semi- variable cost Rs. 5 01

Total variable cost per unit Rs. 25 01

Contribution per unit = Rs. 80 - Rs. 25 = Rs. 55 (after 20% reduction in price) 01

Contribution per unit at the present selling price of Rs. 100 = Rs. 100- Rs. 25 = Rs. 75 01

Total contribution at the present sales volume of 6,000 units @ Rs. 75 per unit is Rs. 450,000.

Sales volume on reduced selling price of Rs. 80 (assuming fixed expense remaining constant)

To earn present amount of profit will be:

=Present contribution/Contribution per unit 01

= Rs. 450,000/Rs. 55 = 8,182 units 01

Sales volume of 8,182 units is more than 80%( i.e. 100/10,000 x 8,182) capacity level, so fixedexpense will increase by Rs. 40,000. Thus to earn present amount of profit, desired contributionwill be Rs. 4,90,000 ( i.e. Rs. 4,50,000 + Rs. 40,000)Sales volume = Rs. 4,90,000/ Rs. 55= 9,909 units

Capacity level = 8,909/10,000 * 100= 89.1%

Total Marks 15

Ans.2.Ibrahim Corporation (Department 2)

Cost of Production ReportFor the Month Ended September 30, 20xx

Quantity Schedule

Units from preceding department 5,000

Units transferred to finished goods 4,000

Units still in process 02

50% Complete 1,000 5,000

Cost Charged to Department Total Rs. Per UnitRs.

Cost from preceding department 20,000 4.00 01

Cost added by department

Materials 18,000 4.00

Labor 9,000 2.00




Applied overhead 9,000 2.00

Total cost added by department 36,000 8.00

Total cost to be accounted for 56,000 12.00 05

Cost Accounted for as Follows Rs. Rs.

Cost transferred to finished goods 48,000 02

4,000 units x Rs. 12.00

Work in process ending inventory

Cost from preceding department

1,000 units x Rs. 4.00 4,000

Materials 1,000 units x 50% x Rs. 4.00 2,000

Labor 1,000 units x 50% x 2.00 1,000

F.O.H 1,000 units x 50% x 2.00 1,000 8,000 03

Total cost accounted for 56,000 02

Notes:

Equivalent Production 02

4,000 units + 1,000 units x 50% = 4,500 units

Unit Cost 03

Material = Rs. 18,000 / 4,500 units =Rs. 4.00

Labor = Rs. 9,000/ 4,500 units = Rs. 2.00

Overhead = Rs. 9,000 / 4,500 units = 2.00

Total Marks 20

Ans.3. (i) Predetermined Factory Overhead Absorption Rates: 05

FOH Absorption BasesPredetermined FOH Absorption Rates

Department A Department B

1 Direct Labor cost base 80% 150%

2 Direct Labor hours base Rs. 8 Rs. 18

3 Machine hours base Rs. 4 Rs. 5

4 Direct material cost base 200% 75%

5 Prime Cost Base 57.14% 50%

Note:

FOH absorption rate =Estimated FOH for the year

(x 100 if base is Rs.)Estimated base for the year




(ii) Total Product Cost for January 20xx:

Particulars(1)

Direct Labor costBase

(2)Direct Labor Hours

Base

(3)Machines Hours

BaseDepartment A: Rs. Rs. Rs.

Direct Materials 450,000 450,000 450,000

Direct Labor 145,000 145,000 145,000

Factory Overhead applied 116,000 112,000 104,000

Total 711,000 707,000 699,000 02

Department B:

Direct materials 250,000 250,000 250,000

Direct Labor 105,000 105,000 105,000

Factory Overhead applied 157,500 171,000 140,000

Total 512,500 526,000 495,000

Total Product cost 1,223,500 1,233,000 1,194,000 02

Notes:

Factory Overhead applied:Department A: 03

(1) Rs. 145,000x 80% = Rs. 116,000

(2) 14,000 hours x Rs. 8 = Rs. 112,000

(3) 26,000 hours x Rs. 4 =Rs. 104,000

Department B: 03

(1) Rs. 145,000x150% =Rs. 157,500

(2) 9,500 hours x Rs. 18 = Rs. 171,000

(3) 28,000 hours x Rs. 15 = Rs. 140,000

Total Marks 15

Ans. 4 (1) Material Price Variance 04

Actual Usage ( St. unit price- Actual unit price)

Ingredient A = 157,000 kgs (Rs. 2.50 - Rs. 2.40) = Rs. 15,700 Fav.

Ingredient B = 38,000 kgs (Rs. 4 - Rs. 4.20) = Rs. 7,600 Adverse

Ingredient C = 36,000 kgs (Rs. 1 - Rs. 1.10) = Rs. 3,600 Adverse

Total Material Price Variance Rs. 4,500 Fav.

(2) Material Mix Variance 04Standard Cost of revised St. mix-standard cost of actual mix

Revised standard mix of Ingredient A

For a standard mixture of 1,200 kgs. A’s mixture will be 800 kgs.

For actual mixture of 231,000 kgs. (157,000 kgs + 28,000 kgs + 36,000 kgs

A’s revised standard mix is 800/ 1,200x 231,000 = 154,000 kgs.

Revised standard Mix of ingredient B = 200/1,200x 231,000 = 38,500 kgs.




Revised standard Mix of ingredient C = 200/ 1,200 x 231,000 = 38,500 kgs.

Standard cost of revised standard mix: Rs.

Ingredient A: 154,000 kgs. @ Rs. 2.50 = 385,000

Ingredient B: 38,500 kgs. @ Rs. 4.00 = 154,000

Ingredient C: 38,500 kgs. @ Re. 1.00 = 38,500

577,500

Less: Standard Cost of Actual Mix:

Ingredient A: 157, 000 kgs @ Rs. 2.50 = 392,500

Ingredient B: 38,000 kgs @ Rs. 4.00 = Rs. 152,000

Ingredient C: 36,000 kgs @ Re. 1.00 = Rs. 36,000 5,80,500

Material Mix variance (Adverse) 3,000

(3) Material Yield variance 04For a standard mix of 1,200 kgs, standard output is 1,000 kgs.For an actual mix of 231, 000 kgs, standard output will be1,000 x 231,000 = 192,500 kgs1,200

Material yield Variance:

Standard Cost per kg of output (Actual output – Standard Output)

Rs. 3 ( 200,000kgs- 192, 500 kgs) = Rs. 22,500 Fav.

Total Marks 12

Ans. 5 1. Predetermined Manufacturing overhead: 04

Est. mfg. OH\ Est. Dl Costs = Rs= 1,600,000\ Rs. 1,230,800 x 100= 130%

2. OH applied: 04DL cost (500* 4 = 2,000 hrs. * Rs. 40) Rs. 80,000

OH applied: Rs. 80,000 * 130% = Rs. 104,000

3. Under\ over Applied: 04Actual OH Rs. 104,500

Applied OH Rs. 104,000

Under Applied OH Rs. 500

Total Marks 12

Ans. 6 Lucky Enterprise

Cost of Goods Manufactured Statement - 2015

Rs. Rs.

Opening Balance – Materials 780,000

Purchases 3,820,000

Material available 4,600,000

Closing Balance – Materials 540,000

Material Consumed 4,060,000




Direct Labor [48,000* Rs. 60] 2,880,000

Manufacturing Overheads:

Indirect Material 120,000

Indirect Labor 80,000

Mfg. Overhead 1,800,000 2,000,000

8,940,000

Opening balance of work in process 540,0009,480,000

Closing balance of work in process 360,000COST OF GOODS MANUFACTURED 9,120,000

Total Marks 08

Ans. 7 Split of Selling Costs into Variable and Fixed Costs:2014 Rs. 710,000 70,0002015 Rs. 650,000 60,000

Rs. 60,000 10,000Rs. 60,000\ 10,000= Rs. 6 Variable cost per unitVariable cost 60,000* Rs. 6 = Rs. 360,000Fixed Costs Rs. 290,000

Total selling costs Rs. 650,000

Manufacturing Overhead:

DL cost 1.5 hr. * 60,000 = 90,000 hours

90,000 hrs. * Rs. 60 = Rs 5,400,000

Variable manufacturing overhead 15% of DL cost = Rs. 810,000

Fixed manufacturing overhead Rs. 390,000

Total manufacturing overhead Rs. 1,200,000

HI-TECH LIMITEDIncome Statement- Variable Costing

Rs. Rs.

Sales [ Rs. 650* 60, 000] 39,000,000

Variable Costs:

Direct Materials [ 6* 25*60,000] 9,000,000

Direct Labor[1.5* 60* 60,000] 5,400,000

Variable Mfg. OH 810,000

Variable Selling Costs 360,000 15,570,000

Contribution Margin 23,430,000

Fixed Mfg. costs 390,000

Fixed selling costs 290,000

Admin. Costs 480,000 1,160,000

Net income 22,270,000

Total Marks 08




(i) Material Ledger CardMaterial-M [FIFO]

04

Date Received Issued BalanceUnits Unit

costAmount Units Unit

CostAmount Units Unit

costAmount

20xxJan. 1 100 8.00 800

Jan. 1 100 8.50 850 100 8.00 800100 8.50 850

Jan. 5 100 8.00 800 100 8.50 850

Jan. 8 200 8.85 1,770 100 8.50 850200 8.85 1,770

Jan. 15 100 9.25 925 100 8.50 850200 8.85 1,770100 9.25 925

Jan.25 100 8.50 850 80 8.85 708120 8.85 1,062 100 9.25 925

Jan. 31 80 8.85 708 100 9.25 925

(ii) Material Ledger CardMaterial – M [LIFO]

03




costAmount

20xxJan. 1 100 8.00 800Jan. 1 100 8.50 850 100 8.00 800

100 8.50 850Jan. 5 100 8.50 850 100 8.00 800Jan. 8 200 8.85 1,770 100 8.50 850

200 8.85 1,770Jan. 15 100 9.25 925 100 8.00 800

200 8.85 1,770100 9.25 925

Jan.25 100 9.25 925 1000 8.800 800120 8.85 1,062 80 8.85 708

Jan. 31 80 8.85 708 100 8.00 800




(iii) Material Ledger CardMaterial – M [Average Cost]

03




costAmount

20xxJan. 1 100 8.00 800

Jan. 1 100 8.50 850 200 8.00 800

Jan. 5 100 8.25 825 100 8.25 825

Jan. 8 200 8.85 1,770 300 8.65 2,595

Jan. 15 100 9.25 925 400 8.80 3,520

Jan.25 220 8.80 1,936 180 8.80 1,584

Jan. 31 80 8.80 704 100 8.80 880

Total Marks 10

*********************



FinancialAccounting

(Level-3)



Solution Financial AccountingSummer Exam-2016

Ans.1.

As per IAS - 18 Dividend from investment in shares are not recognized in the statement of Profitand Loss until a right to received payment is established.

(a) Since Interim Dividend is to be accounted when right to receive dividend is established. NationalInvestment Limited should account such dividend in accounting year 2015-16.

05

(b) National Investment Limited in this case also will accounted for the dividend in the financial year2015-16 and not for the year ending March 31, 2015. Since the right to received dividend did notexist at Balance Sheet Date i.e., as at March 31, 2015 but existed only when AGM of ZaidLimited approved dividend on May 10, 2015.

05

Total Marks 10

Ans.2.

BASIC POULTRY (PRIVATE) LIMITEDPROFIT AND LOSS ACCOUNT

FOR THE YEAR ENDED JUNE 30, 2015

Rs. MarksSales 5,000,000 0.5Cost of Goods Sold (W-01) 2,300,000 0.5Gross Profit 2,700,000Administrative Expenses ( W-02 ) (1,990,000)

710,000Finance Cost (40,000 + 40,000) (80,000) 01

Net Profit for the Year 630,000 01

BASIC POULTRY (PRIVATE) LIMITEDSTATEMENT OF FINANCIAL POSTION

AS ON JUNE 30, 2015Rs.

EQUITY AND LIABILITIESEQUITYPaid up Capital 10,000,000 0.5General Reserves 200,000 0.5Retained Earnings (3,000 + 630 - 200) 3,430,000 01Total Equity 13,630,0008% Debentures 1,000,000 01Current LiabilitiesNotes Payable 300,000 0.5Accounts Payable 400,000 0.5Accrued Expenses (150,000 + 40,000) 190,000 01Total Current Liabilities 890,000TOTAL EQUITY AND LIABILITIES 15,520,000 01




ASSETSNon-current assets (W-03 ) 13,100,000 01Preliminary Expenses (100,000-10,000) 90,000Current AssetsClosing Stocks 500,000 0.5Accounts recently less: Provision Receivables(1,200,000 - 60,000) 1,140,000 0.5Prepaid Expenses (100,000 + 50,000) 150,000 0.5Cash and Bank Balance 540,000 0.5Total Current Assets 2,330,000Total Assets 15,520,000 01

WORKING NOTESWorking - 01 (COST OF GOODS SOLD)Opening Stock 800,000 0.5Add Purchases 2,000,000 0.5Goods Available for Sales 2,800,000 0.5Less Closing Stocks 500,000Cost of Goods Sold 2,300,000 0.5Working - 02 (ADMINISTRATIVE EXPENSES)Salaries (1,200,000 + 150,000 -50,000) 1,300,000 0.5General Expenses 100,000 0.5Insurance Expenses (300,000 - 100,000) 200,000 0.5Preliminary Expenses(100,000%10) 10,000 0.5Bad Debt Expenses (50,000 + 30,000) 80,000 0.5Depreciation Expenses 300,000 0.5Total Administrative Expenses 1,990,000

Working - 03 (NON-CURRENT ASSETS)Land Plant Total

Opening Balance 10,400,000 3,000,000 13,400,000Less Accumulated Depreciation - - -Written Down Value 10,400,000 3,000,000 13,400,000Depreciation Rate 10%Depreciation for the Year - 300,000 300,000 01Accumulated Depreciation - 300,000 300,000

Written Down Value as on June-30-2015 10,400,000 2,700,000 13,100,000 01

Total Marks 20




Ans.3.

FRIENDS COMMODITIES (PRIVATE) LIMITEDSTATEMENT OF CASH FLOW

FOR THE YEAR ENDED JUNE 30, 2015Rs.

CASH FLOWS FROM OPERATING ACTIVITIESProfit before Taxes 110,000 01Adjustments for :Depreciation 60,000 0.5Loss on Disposal of Equipments (20,000 - 17,000) 3,000 63,000 0.5

Operating Profit before Working Capital Changes 173,000 0.5Decrease in Accounts Receivable (410,000 - 460,000) 50,000 0.5Decrease in Inventory (300,000 - 320,000) 20,000 0.5Increase in Prepaid Expenses (20,000 - 15,000) (5,000) 0.5Increase in Accounts Payable (300,000 - 120,000) 180,000 0.5Decrease in Accrued Liabilities (40,000 - 50,00) (10,000) 235,000 0.5Cash Flow from Operating Activities 408,000

Cash Flow from Investing ActivitiesSale Proceeds of Fixed Assets 17,000 0.5Purchase of Investments (50,000 - 25,000) (25,000) 0.5Purchase of Land (560,000 - 300,000) (260,000) (268,000) 0.5Cash used in Investing Activities 140,000

Cash Flow from Financing ActivitiesPayment of Dividends (60,000) 0.5Repayment of Bonds (300,000) 0.5Increase in Share Capital 200,000 (160,000) 0.5Net Decrease in Cash and Cash Equivalents (20,000) 0.5Opening Balance of Cash and Cash Equivalents 50,000 0.5Closing Balance of Cash and Cash Equivalents 30,000 01

Total Marks 10




Ans.4.

UnitsEnding Inventory 1,000Opening Inventory 72,800 0.5Add Purchases 73,800 0.5Total Available (57,000)Less Sales 16,800 0.5Ending Inventory 0.5

Rs.

(1). Ending Inventory - Periodic - FIFO31-05-2015 = 10,100 Units @ Rs.690/unit05-04-2015 = 6,700 Units ((11,310,000 / 15600) * 6,700)Ending Inventory FIFO

6,969,000 014,857,500 01

11,826,500 01

(2). Ending Inventory - Net Realizable ValueSole Volume = (41,325 000 / 57,000 Units) * 16,800 UnitsLess Selling Expenses @ 2% of Rs. 12,180,000Ending Inventory - Net Realizable Value

12,180,000 01(243,600) 01

11,936,400 01Value of Ending InventorySales 41,325,000 0.5Cost of Sales

Opening Stock 560,000 0.5Purchase 50,786,000 0.5

51,346,000Less Closing Stock – at cent 11,826,500 39,519,500 0.5Gross Profit 1,805,500 0.5Operating and Selling Expenses 1,525,900 0.5Net Profit for the Period 279,600 01

Total Marks 12

Ans.5.

IN THE BOOKS OF AHMED & UMERREVALUATION ACCOUNT

Debit CreditParticulars Rs. Particulars Rs.Inventory 1,500 Building 6,350 01Provision for Bad Debts 100 01Furniture 500 01Partners CapitalRevaluation Surplus - Ahmed 2,550 01Partners CapitalRevaluation Surplus - Umer 1,700 01

6,350 6,350




Partners Capital AccountParticulars Ahmed Umer Yousuf Total

Opening Balances of Capital 29,000 15,000 - 44,000Reserve Account 6,000 4,000 - 10,000 0.5Revaluation Account 2,550 1,700 - 4,250 0.5Present Capital before admission of Yousuf 37,550 20,700 - 58,250Cash Account 21,000 46750 0.5Goodwill (Note # 01) 15,450 10,300 - 25,000 0.5New Capital after Admission of Yousuf 53,000 31,000 21,000 105,000Capital Should be after Admission of Yousuf 52,500 31,500 21,000 105,000 0.5Capital to be Raised / (Decrease) (500) 500 - - 0.5

Balance Sheet of New FirmAs on July 01, 2015

Partners Capital - Ahmed 52,500 0.5Partners Capital - Umer 31,500 0.5Partners Capital - Yousuf 21,000 0.5Partners Capital 105,000

Current LiabilitiesCreditors 28,500 0.5Accrued Expenses 4,000 32,500 0.5Total Capital and Liabilities 137,500 0.5

AssetsNon-current Assets - Building 41,350 0.5Non-current Assets - Machinery 19,000 0.5Non-current Assets - Furniture 4,500 0.5Non-current Assets 64,850Goodwill 25,000

Current AssetsDebtors (9,400 - 500) 8,900 0.5Inventory 13,500 0.5Prepaid Expenses 1,500 0.5Cash and Bank Balances 23,750 47,650 0.5(2,000 + 21,000 + 800 - 50)

Total Assets 137,500 0.5




Working NotesCapital of Yousuf = Rs. 21,000 for 2/10th /shareTherefore Total Capital of Firm = 21,000 x 2 / 5 105,000 01Ahmed's Capital = Rs. 105,000 X 5 /10 = 52,500 01Umer's Capital = Rs. 105,000 x 3 /10 31,500 - 01Combined Capital of Ahmed and Umer 84,000Less Present Capital of Ahmed and Umer afterRevaluation of Assets 58,250 01Goodwill to be raised 25,750 01

Total Marks 20

Ans.6.

I.

COST OF BUSESList Price @ Rs. 2,000,000 each 20,000,000 0.5Less Trade Discount @ 10% 2,000,000 0.5

18,000,000Add Additional Cost

Excise Duty and Sales Tax 170,000 0.5Repainting of Buses @ Rs. 10,000 each 100,000 0.5Freight @ Rs. 13,000 each 130,000 400,000 0.5Cost of Buses 18,400,000 0.5

Journal EntriesFixed Assets - Buses 18,000,000 0.5Cash / Bank 18,000,000 0.5(Purchase of Buses from Ching Yong)Fixed Assets - Buses 400,000 0.5Cash / Bank 400,000 0.5(To record additional cost paid on Purchase of Buses)

II. Calculation of DepreciationTotal Cost 18,400,000Depreciation @ 15% for 2013 2,760,000 01Written Down Value December 31, 2013 15,640,000Depreciation @ 15% for 2014 2,346,000 01Written Down Value December 31, 2014 13,294,000Depreciation 2015 1,994,100 01Written Down Value December 31, 2015 for 10 Buses 11,299,900Written Down Value for 01 Bus 1,129,990




GAIN / LOSS ON DISPOSAL OF BUSES

Written Down Value (1,1299,900 x 5) 5,649,950 0.5Cash received 6,650,000 0.5Gain on Sale of 05 Buses 1,000,050 01

Journal Entries DR CRCash 6,650,000 0.5Accumulated Depreciation 3,550,150 0.5Fixed Assets Buses 9,200,000 0.5Gain on sale of Fixed Assets - Buses 1,000,050 0.5(To record gain on disposal of 05 Buses)

Total Marks 12

Ans.7. In the Book of the Marahaba (Private) Limited - Karachi - Head OfficeBranch Stock Account

Debit CreditParticulars Rs. Particulars Rs. (Marks)Opening Balance Stock 17,500 Cash Sales by Branch 131,250 0.50+0.50Goods Sent to Branch 350,000 Credit Sales by Branch 204,167 0.50+0.50Branch Debtors(Return of Goods by Customer)

4,375 Stock Shortage 1,215 0.50+0.50

(1,458 x 100/120)Branch AdjustmentAccount

243 01

1,458 x 20/120)Balance C/d 35,000

371,875 371,875

Branch Debtors AccountDebit CreditParticulars Rs. Particulars RupeesBalance B/d 21,875 Bank Collection 196,875 0.5Credit Sales 204,167 Branch Stock 4,375 0.50+0.50Bank Account(Dishonor of Branch Cheque)

3,646 Bad Debts 1,094 0.50+0.50

Discount 729 0.5Balance c/d 26,615

229,688 229,688




IN THE BOOKS OF THE HEAD OFFICE (ALPHA LIMITED - KARACHI) - HEAD OFFICEBRANCH ADJUSTMENT ACCOUNT

Debit CreditParticulars Rs. Particulars Rs. MarksBranch Stock Account 243 Stock Reserve Account 2,917 01+01(1,458 x 20/120) (17,500 x 20/120)

Stock Reserve Account 5,833 Stock Reserve 58,333 01+01(35,000 x 20/120) (350,000 x 20/120)

Gross Profit C/d 55,174

61,250 61,250

BRANCH PROFIT AND LOSS ACCOUNTDebit Rs. Credit Rs.Particulars ParticularsStock Shortage 1,215 Gross Profit b/f 55,174 0.50+0.50Branch Expenses - Cash 39,010 0.5Bad Debt Expenses 1,094 0.5Discounts 729 0.5

0.5Net Profit of Branch 13,126 01

55,174 55,174 01

Total Marks 16

************************



Business Commn. &Report Writing

(Level-3)



Solution Business Communication & Report WritingSummer Exam-2016

Ans.1. (a)

Effective communication demonstrates the following characteristics:

1. Accuracy- It refers to the accuracy of facts and figures including number, times,dates and names, Inaccuracies may not only create a bad impression for anorganization but also impact on its profitability.

2. Appropriate media and channel – This means selecting the media and channelaccording to the target audience ( their knowledge, education, experience, etc),the nature of the message (complexity), the available time and the cost ofcommunicating

3. Clarity- Clarity makes comprehension of the message easier. When there isclarity in presenting ideas, it’s easy for the receiver to grasp the meaning beingconveyed by the sender. It requires careful choice of language and keeping thecommunication as simple as possible.

4. Appropriate Language ( Image and tone) – Jargon ( technical words andphrases common accurate, clear and appropriate for the situation. Jargon(technical words and phrases common to a specific profession or discipline) andslang (invented words and phrases specific to a certain group of people) shouldavoided. To facilitate understanding, the message may be supported with tables,graphs and other images.

06

(b) Paralanguage describes the vocal yet non-verbal part of communication. They are thevocal features that accompany speech. They include the variance in speed, tone, pitch,volume of voice and stress on words.

Paralanguage affects our communication because the use of same words with thechange in tone, volume, or pitch of voice may convey different meanings to therecipients. The effective use of paralanguage may enhance the efficacy of a message.

03

Total Marks 09

Ans.2. (a)

A model called the ‘Universals of communication’ is used to describe the variouscomponents of interpersonal communication. The model includes following tencomponents:

05

1. Source-receiver2. Encoding-decoding3. Compliance and performance4. Message and their channeling5. Noise

6. Self feedback and feedback from others7. Context8. Field of experience9. Effects10. Ethics

(b) Formal Communication:

Formal Communication refers to the communication taking place through officialchannels in an organization. Such type of communication takes place betweenmanagers or employees of same cadre or between superior and subordinate and viceversa. It is further classified ad vertical (upward and downward), horizontal anddiagonal communication, In formal communication, the authority of superior oversubordinates is well maintained. The information has to pass through a definite route:therefore the flow of information is very systematic.

10




In formal communication, secrecy can be maintained. In this type of communication,the source of each information can be easily located.

Formal Communication increases the work load of various managers as allcommunications are to be transmitted through a definite channel. Sometime the actualmessage is distorted because the distance between the sender & the receiver is so bigthat the information passes through many hands & by the time if reaches the receiver itis inaccurate. Moreover formal communication is mostly conveyed in an impersonalmanner and it lacks personal warmth & involvement.

Informal Communication:Informal communication takes place in an organization without following the formalline of communication. Such type of communication usually takes place among theworkers to exchange their views and to satisfy their social needs. For example, workerstalking about the behavior of their superiors, discussing about some rumors etc. aresome of the examples of informal communication.

Informal communication responsibility for misleading facts can be pinpointed but it isnot so in case of informal communication. Most of the information received throughthis communication in undependable & no important decision can be taken on the basisof this along. It may lead to the leakage of important information which can prove to beharmful for the organization.

Total Marks 15

Ans.3.

The key points to consider in communicating a negative message while retaininggoodwill are as follows:

1. Use a buffer:A buffer is a neutral or positive statement designed to soften the impact ofthe negative message. A good buffer makes the reader more receptive to thenegative message.

2. Offer an explanation:Offering of a sound reason prepares the ground for the reader to accept therefusal. Explanation includes giving convincing reasons why the matter mustbe handled differently from the expectations of the reader

3. Avoid emphasizing the refusal:The refusal message should not be over emphasized, although it should beclearly stated in the message.

4. Present an alternative or compromise:Offering an alternative option would give the reader a different perspectiveand create an impression that the sender cares about the reader and has apositive and helpful attitude.

5. End with a positive statement:The ending of an unfavorable message should be on an assuring and positivenote with a reader-friendly closing.

Total Marks 09




Ans.4.

There are generally three types of listeners we find in an organizational setting. Theyare as follows.

1. Results-oriented– Typically low on patience, these listeners are focused onachieving their goals as quickly and efficiently as possible. Speakers wholike listeners to demonstrate empathy and logical thought often see results-oriented listeners as arrogant and impatient. Conversely results-orientedwould see many speakers as unfocused and become frustrated at speakerstaking too long to make their point.

2. Information-oriented – These listeners like to build a full picture, collectand consolidate all relevant information in order to make the right decision.The risk is that an overly analytical approach can overlook emotionalattitudes and appear unsympathetic to some speakers.

3. People-focused – The priority of this type of listener is not the businessoutcome or a technical solution, but rather a focus on supporting the speakerand being attentive to their feelings and needs. People-focused listeners havelots of patience and are naturally gifted at providing feedback and reflectivequestions that make the speaker feel good and confident about themselves.

The speaker really feels listened-to although a result-oriented orinformation-oriented speaker may feel that a people-focused listener isvague and inconclusive with too much of an emphasis on feelings.

Total Marks 06

Ans.5.

Answers will vary but must meet the following requirements.

1. Opening paragraph: Explain the general background to your enquiry sothat the reader is clear what the letter is about.

2. Body: Must provide specific details about the enquiry and list your questionsin a logical order.

3. Close: Close should contain the ‘call to action’. State clearly what the readershould do and exactly by when.

Total Marks 10

Ans.6.

Answers will vary but the contents of an agenda for a formal meeting would includethe following:

1. Title, date, time and place of the meeting.

2. Purpose of the meeting.

3. Minutes of the previous meeting: Matters arising from the last meeting – how any action points or

outstanding issues have been resolved.

4. Apologies for absence.

5. Main body:(i) HR issues(ii) Finance matters




(iii) Marketing items(iv) Quality Control issues

6. Any other Business.

7. Date of next meeting.

Total Marks 10

Ans.7.

Answers will vary but must contain the following:

1. Introduction

2. SWOT Analysis

3. Conclusion

4. Recommendation

Total Marks 15

Ans.8.

Answers will vary but CV must:

(i) Be restricted to ONE page in length or two pages at maximum.

(ii) Convey the candidate’s key experience and skills quickly.(iii) Order information within sections with the most recent and relevant first.

(iv) Provide an overview of experience and other qualifications.

(v) Highlight the applicant’s special talents and background that will benefit theemployer.

(vi) Should demonstrate that the applicant can make a positive contributiontowards the company’s business objectives.

Total Marks 10

Ans.9.

Benefits of email:

1. An audit trail of messages is automatically retained (and can be for longperiods). This can be invaluable in disputes or simply to check the details ofan email conversation or client order.

2. The sending and receiving of emails is virtually instantaneous anywhere in theworld. This enables managers to communicate with colleagues and companiesto communicate with clients or suppliers incredibly quickly.

3. Recipients can access emails anywhere and anytime at their convenience.

4. Traditional and expensive mail shots to multiple recipients can be replaced bysignificantly quicker and cheaper multi-recipient email communicationsachieving much greater penetration.

5. Easy to use and organize daily correspondence.

6. Low cost.

7. Good for the environment – doesn’t use paper.

Total Marks 07




Ans.10.

Video conferencing is on the rise and just about every company utilizes it to somedegree. There are various reasons for its popularity few have been discussed below:

1. Improved lower-cost technology with greater bandwidth2. Wider variety of video conferencing tools available associated with

increasingly more powerful PCs.3. Environmentally friendly IT initiatives such reduced air travel.4. High travel costs combined with austerity related cost saving initiatives.5. Reliability: One can hold meeting regardless of weather, flight delays, or many

other reasons. One can always be able to connect with the members no matterwhere they are.

6. Increase Productivity: Meet as much as one to get the job done instead of onlywhen it is scheduled. It is so easy to bring someone into the conversation thatthere’s no pressure to fill up an hour to justify the scheduling.

7. Improve Employee Morale: The employees may contribute to decision makingwhich increases their morale.

8. Improve safety and security both for people as well as information.

Total Marks 09

***********************



Taxation

(Level-3)



Solution TaxationSummer Exam-2016

Ans.1. (i)

Filer: A taxpayer whose name is appears in the ‘active taxpayer’ list’ or is the holder ofa ‘taxpayer’s card’s is termed as ‘filer’. The active taxpayers’ list is issued by FBR fromtime to time. Sec 2-(23A)

02

(ii) Imputable Income: ‘Imputable income’ has been defined in relation to an amountwhich is subject to ‘final tax’ and means the income which would have resulted in thesame tax, had this amount not been subject to final tax. Sec 2-(28A)

02

(iii) Small Company: Small Company’ means a company which fulfills the followingconditions:

1. It is a company registered under the Companies Ordinance, 1984;

2. It is registered on or after 1st July, 2005; and

3. The Company:(i) Has paid-up capital plus undistributed reserves up to rupees fifty (50) million;

(ii) Has employees not exceeding two hundred and fifty (250) at any time during theyear;

(iii) Has total annual turnover up to rupees two hundred and fifty (250) million; and

(iv) Is not formed by the splitting up or the reconstitution of company already inexistence. 2(59A)

02

Total Marks 06

Ans.2.

Power of Parliament to impose tax on the income of certain Corporations:

1. Parliament has, and shall be deemed always to have had, the power to make a lawto provide for the levy and recovery of a tax on the income of a corporation,company or other body or institution established by or under a Federal law or aProvincial law or an existing law or a corporation, company or other body orinstitution owned or controlled, either directly or indirectly, by the FederalGovernment or a Provincial Government, regardless of the ultimate destination ofsuch income.

2. All orders made, proceedings taken and acts done by any authority or person,which were made, taken or done, or purported to have been made, taken or done,before the commencement of the Constitution (Amendment) Order 1985, inexercise of the powers derived from any law referred to in clause (1), or inexecution of any orders made by any authority in the exercise or purportedexercise of powers as aforesaid, shall, notwithstanding any judgment of any courtor tribunal, including the Supreme Court and a High Court, be deemed to be andalways to have been validly made, taken or done and-shall not be called inquestion in any court, including the Supreme Court and a High Court, on anyground whatsoever.

3. Every judgment or order of any court or tribunal, including the Supreme Courtand a High Court, which is repugnant to the provisions of clause (1) or clause (2)shall be, and shall be deemed always to have been, void and of no effectwhatsoever.

Total Marks 09




Ans.3.

Unexplained Incomes or Assets:

The value of any income, expenditure, investment, article or asset, etc., shall bechargeable to tax under the head “Income from Other Sources” if the followingconditions are met:

1. It is any:

(i) Amount which is credited in a person’s books of account;(ii) Investment made by a person;

(iii) Money or valuable article owned by a person;

(iv) Expenditure incurred by a person; or

(v) Concealment of any income or furnishing of inaccurate particulars of income,which includes:

a) The suppression of any production, sales or any amount chargeable totax; or

b) The suppression of any item of receipt liable to tax in whole or inpart;

2. The person offers no explanation about the nature or source of the transaction,concealment of income or furnishing of inaccurate particulars of income or theexplanation offered by him is not, in the opinion of the Commissioner, satisfactory;and

3. Where a person claims the ‘Agricultural income’ as his source of investment,expenditure, etc, than it shall be accepted only to the extent of agricultural incomeworked back on the basis of agricultural income tax paid under the relevantprovincial law.

4. The amount shall be included in person’s income chargeable to tax in the tax yearto which such amount relates.

5. If the foreign remittance is received from outside Pakistan through normal bankingchannels which is encashed into rupee by a scheduled bank and certificate fromsuch bank is produced to that effect, the section 111 on such amount or assetscreated from such amount , shall not be applicable

Total Marks 10

Ans.4.

Name of Tax Payer : Mr. AKRAMNational Tax Number : XXXTax Year Ended : 30th June 2015Tax Year : 200APersonal Status : Individual, Non-SalariedResidential Status : Non-Resident

Taxable Income and Tax LiabilityTaxpayer has incomes under different heads. Their taxability is as below:

Contd…




Income from Property Rs. Rs.Rent chargeable to tax (RCT)

Rent (Rs. 50,000x12) 600,000 600,000Less: Admissible deductions:Repair Allowances (1/5th of Rs. 600,000) 120,000Property tax paid for the year [N-1] 5,000Interest on loan 10,000Property tax (For the last year) paid [N-2] 5,000 140,000

Total Income 460,000Less: Zakat on DSCs 5,000

455,000Taxable IncomeTax Liability:

Tax on initial Rs. 400,000 NilTax on next Rs. 55,000 @ 7% 3,850Total tax 3,850

Note-1

Encashment of Saving Bank AccountThis income is taxable under final tax regime. Tax at source is deducted at the time ofcrediting interest to the account of account holder. Tax so deducted is treated as finaldischarge of tax liability in respect of such income. Thus, no further tax shall be payable.So encashment of DSC in not chargeable to tax.

Note-2

Income of Defense Saving CertificatesThis income is also covered under FTR and tax deducted at source is considered as finaldischarge of the tax liability. It does not form part of taxable income under normalprocedure.

Total Marks 15

Ans.5.(a)

Adjustment of Excise Duty: While determining the net liability under the FederalExcise Act, 2005 a person is allowed to deduct the duty already paid on goods specifiedin the first schedule from the excise duty levied on the goods manufactured by him. Thisadjustment shall be allowed if the following conditions are fulfilled:

The goods are used directly as input goods for manufacture or production; The person holds a valid proof to the effect that he has paid the price of the

goods (including the excise duty) purchased by him through banking channels. The person has received the price of the goods (including the excise duty) sold

by him through banking channels; and The person is a registered person.

The Board may disallow or restrict the adjustment of the whole or a part of excise duty inrespect of any goods or class of goods. It may also regulate the adjustment of the exciseduty.

06




Ans.5.(b)

Drawback of Duty:

The Board is empowered to grant drawback of excise duty paid on any of the followinggoods:

1. Goods used in manufacture of such goods in Pakistan which are exported out ofPakistan.

2. Goods in nature of provisions or stores shipped for consumption on board a shipor aircraft proceeding to a destination outside Pakistan.

The Board shall notify the rate or rates of drawback. It may also impose the conditions orlimitations applicable to the drawback of excise duty.

Prohibition of drawback of Duty:Irrespective of the provisions regarding ‘zero rate of duty u/s 5(1)’ or ‘drawback of duty u/s5(2)’ the board may prohibit the payment of drawback, refund or adjustment of duty uponthe exportation of goods or any specified goods or class of goods to any specified foreignport or territory. The board while exercising this power shall notify the goods and territoryin the official gazette.

03

03

Total Marks 12

Ans.6.(a)

Provision of Minimum Tax:

(i) It is applicable to:(a) A resident company;(b) An individual having turnover of fifty million rupees or more; and(c) An AOP having turnover of fifty million rupees or above.

(ii) Turnover tax (Minimum Tax) is levied at the following rates applied to person’sturnover for the tax year:S. # Persons Tax Rate

1. a) Oil marketing companies, Oil refineries, Sui Southern GasCompany Limited. Sui northern Gas Pipelines Limited (for thecases where annual turnover exceeds rupees one billion);

b) Pakistan Airlines;c) Poultry industry including poultry breeding, broiler production,

egg production and poultry feed production; andd) Dealers and distributors of fertilizers.

0.5%

2. a) Distributors of pharmaceutical products, fast moving consumergoods and cigarettes;

b) Petroleum agents and distributors who are registered underSales tax Act, 1990;

c) Rice mills and dealers; andd) Flour mills.

0.2%

3. Motorcycle dealers registered under the Sales Tax Act, 1990. 0.25%4. In all other cases 01%

08




(iii) Where any of above referred persons has no tax liability under the normal taxprocedure is less than the tax as per above table, than the person shall be required topay this tax. In other words the tax liability of a person for any tax year shall be thehigher of the tax determine under NTR or tax computed by applying the above ratesto the person’s turnover for the tax year.

(iv) The reasons for no Tax Liability or less Tax Liability may be all or any of thefollowing:

(a) Sustaining of a loss;(b) Setting off of a loss of an earlier years;(c) Exemption from tax;(d) Application of credits or rebates; or(e) Claiming of allowances or deductions (including depreciation and

amortization) allowed under Income tax Ordinance or any other law.

“Tax payable or paid” does not include the tax already paid or payable in respect ofdeemed income which is covered under final tax regime (FTR).

(b) Benefits and Conditions of Section 65(B)

A tax credit equal to 10% of the amount invested by a company in purchase of plant andmachinery shall be allowed against the tax payable by it.

Other provisions in this regard are:

1. The plant and machinery is purchased by the company for purposes of extension,expansion, balancing, modernization and replacement (BMR) of the plant andmachinery already installed.

2. The plant and machinery is for an industrial undertaking set up in Pakistan and isowned by the company making the investment.

3. The plant and machinery should be purchased between 01-07-2010 and 30-06-2016.

4. The amount of tax credit shall be deducted from the tax for tax year in which plantor machinery.

5. Where there is no tax payable for the year in which plant or machinery is installedor tax payable for that year is less than the amount of tax credit, the unadjusted taxcredit shall be carried forward and deducted against tax payable for following taxyears.

6. The amount of unadjusted tax credit may be carried forward maximum for the two(2) tax years.

7. The Commissioner may re-compute the tax payable for the relevant tax payablefor the tax years if subsequently it is found by him that any of the above-referredconditions was not fulfilled. Under this case it shall be deemed that tax credit waswrongly allowed.

08

Total Marks 16




Ans.7.

Provisional Assessment 122 (C)

The Income Tax Ordinance, 2001 contain the two different sections regarding to provisionalassessment. These sections deal with two different situations in which the commissionermay make provisional assessment order. Each of these provisions is below:

Provisional assessment for non-filing of return [122(C)]

The commissioner may makes the provision assessment if a person fails to furnish a returnof income in response to a notice issued by the commissioner u/s 114 (3) and 114(4) of theincome tax ordinance, 2001. Other provision in this regard is:

1. The Commissioner shall make the provisional assessment on the basis of anyavailable information of material and to the best of his judgment.

2. The provisional assessment order shall specify the assessed taxable income andamount of tax due.

3. The provisional assessment shall be treated as final assessment after the expiryof forty – five (45) days from the date of service of provisional assessment order.

4. The provisional assessment shall not be treated as final assessment if the person(being an individual or an AOP) files the following documents within the above–referred period of forty-five (45) days:

(i) A Wealth Statement;

(ii) A Wealth Reconciliation Statement ; and

(iii) An explanation of Source of Assets or Income

The provisional assessment shall not be treated as final assessment if the companyelectronically files the return of income along with audited account or final within the above–referred period forty-five (45) days.

Provisional Assessment for Concealed Assets 123

Where the taxpayer has a concealed assets and that asset is impounded by any governmentdepartment or agency, the commissioner may make an order assessing there in the taxableincome and the tax liability of the taxpayer. This assessment is subject to the followingconditions:

1. A provisional assessment may be made before an assessment or amendedassessment is made u/s 121 or 122.

2. It is to be made in writing

3. The commissioner shall finalize the provisional assessment as soon as practicable

4. It is made on basis on the value of the ‘concealed asset’.5. The provisional assessment order is issued for the last completed tax year.

07

03

Total Marks 10

Ans.8.

ASSESSMENT OF TAX U/S 11 OF SALES TAX ACT 1990

Under the following circumstances, an authorized officer of Inland Revenue shall make anorder for assessment of tax, including imposition of penalty and default surcharge:




1. Where a person who is required to file a return has failed to file it by due date;

2. Where a person, due to some miscalculations, pays a lesser amount than actuallypayable;

3. Where a has not paid the tax due on supplies made by him;

4. Where a person has claimed a credit or refund of an input tax which was notadmissible under the Sales Tax Act, 1990;

5. Where by reasons of some collusion or a deliberate act any tax or charge has notbeen levied or made or has been short-levied or has been erroneously refunded;

6. Where by reason of any inadvertence, error or misconstruction, any tax or chargehas not been levied or made or short-levied or has been erroneously refunded.

The officer of Inland Revenue shall give a show-cause notice within five years and providean opportunity of being heard to a person before making an order for assessment of tax, etc.Where a person files the return after a due date and pays the amount of tax payable alongwith default surcharge and penalty, the show-cause notice and the order of assessment shallabate.

Provided:

1. The assessment order shall be made within one hundred and twenty days of theissuance of the show-cause notice. The Commissioner may extent this periodmaximum upto ninety days. However, while extending the period, he must recordthe reasons for extension.

2. Any period during which proceeding are adjourned on account of a stay order oralternative dispute resolution proceeding or the time taken through theadjournment by the petitioner shall be excluded from the computation of abovereferred period.

3. The proceedings may be adjourned at the application of the petitioner for amaximum period of sixty days.

Total Marks 10

Ans.9.

Output tax Rs. 12,000,000@ 17% 2,040,000Less: Allowable input tax N-1 1,212,100Net tax liability 827,900

N -1 Input Tax on Purchase

Item Purchase Total Credit Not Allowed Credit AllowedCement - Rs. 6,000,000 @17% 1,020,000 51,000 969,000

Concrete - Rs. 700,000 @ 17% 119,000 11,900 107,100Steel - Rs. 1,000,000@ 17% 170,000 34,000 136,000Total 1,309,000 96,900 1,212,100




Input tax not allowed is computed as below:

Cement: (1,020,000 / 20,000) × 1,000 =51,000

Concrete: (119,000 / 20,000) × 2,000 =11,900

Steel: (170,000 / 50) × 10 =34,000

Note:The credit of input tax is not allowed in respect of such goods, which are used for a purposeother than manufacture or supply of taxable goods.

Total Marks 12

************************



FinancialReporting

(Level-4)



Solution Financial ReportingSummer Exam-2016

Ans.01.

P. Co. Consolidated Statement of Comprehensive Income for the Year Ended Dec. 31st, 2015

P Co. S Co. Adjustments

Total

Rs. (000)Revenue 50,250 30,510 (4,800) 75,960 02Cost of sales (22,225) (12,475) 2,031.25 (32,668.75) 02Gross profit 28,025 18,035 (2,768.75) 43,291.25Operating expenses (12,635) (12,610) -- (25,245) 01Operating profit 15,390 5,425 (2,768.25) 18,046.25Finance cost (7,450) (2,500) 500 (9,450) 01Investment income 2,500 -- (2,200) 300 01Profit before tax 10,440 2,925 (4,468.25) 8,896.25Tax expense (3,375) (1,236) -- (4,611) 02Profit after tax 7,065 1,689 (4,468.25) 4,285.25Non-controlling interest W-2 196.65 196.65 02Profit attributable to owners ofparent

7,065 1,885.65 (4,468.25) 4,481.90

Other comprehensive incomeItems that may not be reclassified toP&LRevaluation surplus 10,250 2,450 -- 12,700 01Other comprehensive income 10,250 2,450 -- 12,700Non-controlling interest (15%) -- (367.50) -- (367.50) 02OCI attributable to owners of parent 10,250 2,082.50 -- 12,332.50Total comprehensive incomeAttributable to:-

Owners of Parent 16,814.40 01Non-controlling interest (367.5 -196.65) 170.85

16,985.25 01

Working notesW-1 Double entries Debit Credit

Rs. (000) Rs.(000)

04 marks

Sales 4,800Cost of sales 4,800

Elimination of intra group salesCost of sales 200Closing stock 200

Elimination of un-realized profit (800x1/4)Cost of sales 500Property, plant and equipment 500




Elimination of gain on disposalProperty, plant and equipment 31.25Cost of sales 31.25

Elimination on extra depreciation(500/4)x3/12

Investment income 1,700Dividend 1,700

Elimination of intra group dividend(2,000x85%)

Investment income 500Interest expense 500

Elimination of intra group interest income(2,500x20%)

Cost of sales 1,000Intangible asset 1,000

Charge of amortizationCost of sales 1,500Goodwill 1,500

W-2 Calculation of Non-controlling interest Rs. (000) Rs. (000) 02 marksProfit after tax 1,689

Adjustments for: -Gain on disposal (500)Amortization of intangible asset (1,000)Impairment loss on goodwill (1,500) (3,000)

(1,311)Share of NCI (1,311x15%) (196.65)

Total Marks 22

Ans.2.(a)

The provision should be recognized for Rs. 250,00002mrks as the claim has been acceptedby the court and now it has become legal obligation. However, when the appeal isaccepted by the court the provision may be reduced to Rs. 100,00002mrks.

04

(b) The final dividend declared will only be disclosed in the financial statement and norecognition is required under IFRS.

03

(c) The expense to be recognized in profit or loss account will be Rs. 7 million (5+2.5)01mrk

and development cost of Rs. 12.502mrks million (15-2.5) should be presented in thestatement of financial position.

03

Total Marks 10




Ans.3.

Notes to Financial StatementsDeferred Tax Liability

2015 2014Rs. Rs.

Taxable Temporary DifferencesAccelerated Depreciation2014 (290,000 – 150,000) x 33%2015 (330,000 – 180,000) x 32% 48,000

46,200 0202

Revaluation Surplus2015 (50,000 – 5,000) x 32% 14,400 -- 01

62,400 46,200

Deferred Tax Expense2015

Rs.Profit or loss account

Deferred Tax –Timing Differences (46,200+16,000-62,400-1,400) (1,600) 02Deferred Tax effect of Tax Rate (300,000-160,000)x1% 1,400 02

(200)Other comprehensive income

Deferred Tax (50,000x32%) (16,000) 01Total Deferred Tax Expense (16,200)

Total Marks 10

Ans.4.

Statement of Comprehensive Income

2015Rs. (000)

Revenue (25,150-1,000-200) 23,950.00 02+01Cost of Sales (12,360-800+[(550/5)x3/12] (11,587.50) 02+01Gross Profit - 12,362.50 01Operating Expenses (2,658.00) 01Operating Profit 9,704.50Finance Cost (1252-550) (702.00) 02+01Dividend Income (500-500) --Profit before Tax 9,002.50 01Tax Expense (5,727.20) 03Profit after Tax 3,275.30

Total Marks 15




Ans.5.

Rs. (m)Statement of Financial PositionCost to date 120 01Loss to date (30)Contract work in progress 90 01Progress billings raised (100) 01Due to customers (A) (10)Progress billings raised 100Receipts to date (85) 01Receivables (B) 15Net balance due from customer (A+B) 5

Statement of Comprehensive IncomeRevenue to be recognized (220x120/250) 105.60 01Cost to be expensed out (120.00)Gross loss (14.40) 01Provision for onerous contract (250-220-14.40) (15.60) 01Total loss for the year (30.00) 01

Total Marks 08

Ans.6.

This contact of sales and lease back is resulting in finance lease. The gain on disposal in saleand lease back in which ultimately lease results into finance lease is deferred and amortizedover the lease term. In case of loss the loss is also deferred and amortized over the lease termunless the loss is categorized as impairment loss. The impairment loss however, is charged toprofit or loss account.

Debit CreditRs. Rs.

Disposal account 150,000Asset account 150,000 02

Recognition of disposal of assetBank account 270,000Disposal account 270,000 02

Receipt of disposal proceedsDisposal account 15,000Deferred gain 15,000 02

Recognition of Deferred Gain on disposalLease asset 255,000Lease liability 255,000 02

02

Total Marks 10




Ans.7.

Borrowing Cost on specified fund to be capitalized:

Rs. (m)Rs. 50 x 12.5% x 11/12 5.73 05

Investment Income on unused specified fund:

(0 + 50/2) x 4% x 11/12 (0.92)

Borrowing Cost to be capitalized 4.81

05

Total Marks 10

Ans.8.

Statement of Financial Position Rs. (000)Cost to date 1,100.00 01Profit to date 185.72 02Contract work in progress 1285.72Progress billings to date (1,120.00) 02Due from customers 165.72

Progress billings to date 1,120.00 01Receipts to date (750.00) 02Adjustment against mobilization advance (500.00) 02Receivable (130.00)Net balance due 35.72Statement of Comprehensive IncomeProfit or loss accountRevenue [2,375 (1300/2,450)] 1,300 02Expenses (1,114.20) 02Profit for the year [2,450-2,100]x[1,300/2,450] 185.72 01

Total Marks 15

**************************



ManagementAccounting

(Level-4)



Solution Management AccountingSummer Exam-2016

Ans. 01.

Rasheed Textilesi) Simple Payback

Year A B

0 (1200) (800)

1 (1000) (750)

2 (700) (700)

3 (300) (300)

(300/450 x 12)= 8 (300/500 x 12) = 7

3years, 8months 3years, 7months 1.5 + 1.5

According to the simple payback both the projects are very much the same but project B ishowever paying back one month earlier than project A.

ii) Discounted Payback

Year A B

Present Values Recovery Present Values Recovery

@ 10% @ 10%

0 (1200) (1200) (800) (800)

1 182 (1018) 45 (755)

2 248 (770) 41 (714)

3 300 (470) 300 (414)

4 307 (163) 342 (72)

5 311 - 373 -

DPP of A = 4years, (163/311 x 12) months = 4years, 6months 02

DPP of B = 4years, (72/373 x 12) months = 4years, 2months 02

According to the discounted payback period, project B is recovering the present value4months earlier than project A.




iii) NPV

Years A B

0 (1200) (800)

1 182 45

2 248 41

3 300 300

4 307 342

5 311 373

NPV 148 301 02+02

iv) IRR

Present Values @ Discount Factor 20%

Year A B

0 (1200) (800)

1 167 42

2 208 35

3 231 231

4 217 241

5 201 241

NPV (176) (10)

IRR of Project A = 10 + {[(148)/ (148 + 176)] x [20 – 10]} = 14.6% 02IRR of Project B = 10 + {[(301)/ (301 + 10)] x [20 – 10]} = 19.7% 02According to the IRR method both projects should be acceptable because they have IRRgreater than their cost of capitals but project B is better than project A because it has ahigher IRR than A.

According to the timing of cash flows a project that recovers major portion of its investment ininitial periods is better than a project that recovers them in the later phase of the project’s life. Thisis because as further as we move into the future the more the outcomes become unpredictable.Therefore according to this analysis project A is better than project B.

However as the other methods suggest project B is more attractive then project A.

Total Marks 15




Ans. 02.

M/s Superior BusinessFor the months of Jan-17 to June 17

Monthly Cash budget Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 TotalOpening Balance 50,000 27,000 40,800 46,000 63,400 9,400 50,000Cash sales 1,000 3,000 2,000 1,000 2,000 9,000 1.25Collection from debtors 75,000 76,800 62,200 78,400 63,000 76,200 431,600 1.50Receipt of dividends 5,000 5,000 0.25Sales of assets 20,000 20,000 0.25Total receipt 81,000 96,800 65,200 80,400 64,000 78,200 465,600

Total cash available 131,000 123,800 106,000 126,400 127,400 87,600 515,600

PaymentsCash purchases 2,000 1,000 3,000 1,000 7,000 1.00Payment to creditors 50,000 20,000 30,000 40,000 30,000 40,000 210,000 1.50Payments of dividends 30,000 30,000 0.25Repayments of loan 20,000 30,000 50,000 0.50interest payment 2,000 3,000 5,000 0.50Purchases of assets 25,000 30,000 55,000 0.50Salaries 10,000 10,000 10,000 10,000 10,000 10,000 60,000 0.50Expenses 12,000 5,000 20,000 10,000 15,000 12,000 74,000 1.50

104,000 83,000 60,000 63,000 118,000 63,000 491,000Closing balance of cash 27,000 40,800 46,000 63,400 9,400 24,600 24,600 1.50

Schedule of monthly receipts from the debtorsMonths Credit Sales Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17Nov-16 50,000 9,000 0.50Dec-16 60,000 12,000 10,800 1.00Jan-17 90,000 54,000 18,000 16,200 1.50Feb-17 80,000 48,000 16,000 14,400 1.50Mar-17 50,000 30,000 10,000 9,000 1.50Apr-17 90,000 54,000 18,000 16,200 1.50May-17 60,000 36,000 12,000 1.00Jun-17 80,000 48,000 0.50

75,000 76,800 62,200 78,400 63,000 76,200

Months Credit Sales Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-173 90,000 54,000 48,000 30,000 54,000 36,000 48,0002 60,000 12,000 18,000 16,000 10,000 18,000 12,0001 50,000 9,000 10,800 16,200 14,400 9,000 16,200

75,000 76,800 62,200 78,400 63,000 76,200

Total Marks 20




Ans. 03.Product A

per unitProduct B

per unitSales price 70 65Variable cost 35 35Contribution 35 30Production Hours 3 2Contribution per hour 11.67 15 2Priority 2 1 0.5Production Constrain under current scenarioAvailable maximum market for product B 7,000 units 0.5Production time 2Hours used by product B 14,000 hrsBalance hours (25,000-14,000) 11,000 hrsPer unit time required for product A 3Units to be produced of product A 3,666 Units 2

Production Constrain after accepting additional marketing proposedNew Maximum market Product B 9,000 units 0.5Production time product 2Hours used by product B 18,000 hrsBalance hours for product (25000-18000) 7,000 hrsTime req. for product A 3Units to be produced A 2,333 Units 2

Profit and Loss Account Under Marginal Costing as per existing production:

Product A Product B TotalUnits 5,000 4,000Sales revenue 350,000 260,000 610,000less variable cost 175,000 140,000 315,000Contribution Margin 175,000 120,000 295,000 2Less Fixed cost per year 110,000Profit for the year 185,000 0.5Profit and loss acc Under marginal costing

Maximum possible production without additional marketingUnits 3,666 7,000Sales revenue 256,620 455,000 711,620Less variable cost 128,310 245,000 373,310Contribution Margin 128,310 210,000 338,310 2Less Fixed cost per year 110,000Profit for the year 228,310 0.5




Profit and loss acc Under Marginal Costing after accepting Additional Marketing

Product A Product B TotalUnits 2,333 9,000Sales revenue 163,310 585,000 748,310Less variable cost 81,655 315,000 396,655Contribution Margin 81,655 270,000 351,655 2Less Fixed cost per year 160,000Profit for the year 191,655 0.5

Ans. 04.

Telecom Co.Cost Statement

Rs. Note

Lunch 0 1

Engineer Cost 600 2

Technical Advisor 540 3

Site Visits 0 4

Training Costs 130 5

Handsets 2160 6

Control System 7700 7

Cable 1350 8

Total Cost 12,480

NotesNote 1: Lunch 01This past cost is a ‘sunk cost’ and should therefore be excluded from the cost statement. It hasalready arisen and is therefore not incremental.

Note 2: Engineers’ Costs 03Since one of the engineers has spare capacity, the relevant cost of his hours is Nil. This is becauserelevant costs must arise as a future consequence of the decision, and since his wage will be paidregardless of whether he now works on the contract for Plus Co, it is not an incremental cost.

Total Marks 15




The situation for the other two engineers is slightly different. Their time is currently fully utilizedand earning a contribution of Rs.6 per hour each. This is after deducting their hourly cost which,given a salary of Rs.5,000 per month each, is Rs.31.25 per hour (Rs.5,000/ (4 x 40)). However, inone week’s time – when they would otherwise be idle – they can complete Contract X and earn thecontribution anyway. Therefore, the only relevant cost is the penalty of Rs.600 that will be payablefor the delay on Contract X.

Note 3: Technical Advisor 02Since the advisor would have to work overtime on this contract, the relevant cost is the overtimerate of Rs.67.50 (Rs.45 x 1·5) per hour. This would total Rs.540 for the whole job.

Note 4: Site Visits 02This is a cost paid directly by Plus Co to a third party. Since it is not a relevant cost for Telecom Co.it has been excluded.

Note 5: Training Costs 03Since the trainer is paid a monthly salary irrespective of what work he does, this element of his costis not relevant to the contract, since it is not incremental. However, the commission of Rs.130 willarise directly as a consequence of the decision and must therefore be included.

Note 6: Handsets 03Although Telecom Co has 80 of the 120 handsets required already in inventory, they are clearly inregular use in the business. Therefore, if the 80 are used on this contract, they will simply need to bereplaced again. Consequently, the relevant cost for both the 40 that need to be bought and the 80already in inventory is the current purchase price of Rs.18·00 each. 120 x Rs.18·00 = Rs. 2,160.

Note 7: Control System 03The historic cost of Swipe 1, Rs.5500, is a ‘sunk’ cost and not relevant to this decision. However,since the company could sell it for Rs.3200 if it did not use it for this contract, the Rs.3200 is anopportunity cost here. The current market price for Swipe 1 of Rs.5400 is totally irrelevant to thedecision as Telecom Co has no intention of replacing Swipe 1, since it was bought in error. Inaddition to the Rs.3200, there is a modification cost of Rs.4500, bringing the total cost of convertingSwipe 1 to Rs.7,700. This is still a cheaper option than buying Swipe 2 for Rs.11000 therefore thecompany would choose to do the modification to Swipe 1. The cost of Rs.11000 of a new Swipe 2system is therefore irrelevant now.

Note 8: 03The cable is in regular use by Telecom Co, therefore all 1000meters should be valued at currentmarket price of Rs. 1.35 per meter. The Rs.1.25 meter is sunk cost and not relevant.

Total Marks 20




Ans. 05.

(i) ROCE = Operating Profit/Capital Employed x 100%Rs.’000 ROCE

S Co. Design Division 6,000/24,000 25% 01Gearbox Division 3,875/32,500 11.99% 01

Z Co. 7,010/83,000 8.45% 01

(ii) Asset turnover = Sales/Capital Employed x 100%

Rs.’000 Asset TurnoverS Co. Design Division 14,300/24,000 59.6 01

Gearbox Division 25,535/32,500 78.6 01Z Co. - 15,560/83,000 18.75 01

(iii) Operating profit margin = Operating Profit/Sales x 100%

Rs.’000 Operating ProfitS Co. Design Division 6,000/14,300 41.96% 01

Gearbox Division 3,875/25,535 15.18% 01Z Co. 7,010/15,560 45.05% 01

Overall 1.5Both companies and both divisions within S co are clearly profitable In terms of what thedifferent ratios tell us, Overall if results of both Operating profit ratio and assets turnover ratioare considered The design division of S Co. comes out top overall WS X,

ROCE 1.5ROCE tells us the return which a company is making from its capital. The design division of SCo is making the highest return at 25% more than twice that of the Gearbox division andnearly three times that of Z Co. This is because that nature of a design business is such thatProfits are largely derived from the people making the designs rather than from the assetsCertain assets will obviously be necessary in order to produce the designs but it is theemployees who are mostly responsible for generating profit ROCE of Gearbox division andDesign division are fairly similar if both the division are compared in isolation. The Gearboxdivision ROCE is 3% higher than Z Co because Z Cos has larger assets base than the Gearboxdivision.Assets Turnover ratio, 1.5It can be seen that the Gearbox divisions assets generate a very high proportion of sales per Rs.of assets (79%) compared to Z Co 19%. This is partly because the Gearbox division buys itscomponents in from Z Co. and therefore not need to have the large asset which Z Co. need tomake components.




Operating Profit 1.5

The profitability of S Co Design division and Z Co is much higher Than Gear Box division i.e.41.96% and 45.05% as against 15.18%. The design division like the Gearbox division is alsousing its assets to generate sales. but then like Z Co, its units profitability is high too (42%operating profit margin).

Ans. 06.

Contribution margin per patientFee 500Variable cost 180

Contribution margin per patient 320 03

Contribution margin ratio:320/500*100 64% 04

Break-even in number of patientsRs.2000000/320 6,250 02Rs.2000000/64% 3,125,000 02

Target ProfitDesired Net income 1,800,000Add: Fixed Cost 2,000,000Contribution Margin 3,800,000Required Sales 5,937,500Fee: 500Patients must visit clinic to achieve Net Income 11,875 04

*************************

Total Marks 15

Total Marks 15



Audit,Assurance &

Ethics

(Level-4)



Solution Audit, Assurance & EthicsSummer Exam-2016

Ans.1.

2 marks per part, 1 each for rationale and conclusion. 1 mark may be awardedwhere rationale appears to be appropriate but conclusion is incorrect.

a. Since inventories physically verified differ from the balance shown in the books andthe difference is material, it can be concluded that the financial statements arematerially misstated. However the effect does not seem to be pervasive as themisstatement is limited to only inventories and most of the other assets (i.e. fixedassets which are 60% of total assets) are unaffected by this misstatement. In thissituation therefore, a qualified opinion should be given.

02

b. The item in question is material since it constitutes 10% of the company’s profits forthe year. Since it has been established that the prevailing law has been breached i.e.the required maximum level of chemical release of 1 ton has been exceededsignificantly and the company has released 2.4 tons, it is clear that the company islikely to be held responsible for the breach of law. Since a notice has not beenformally received, a liability does not accrue but a provision has to be recorded.Management’s refusal to record the provision means the financial statements aremisstated by a material amount. In these circumstances, a qualified opinion should beexpressed in the audit report.

02

c. In this case since the beverage manufacturing company was formed only a year ago, itis likely that the plant and machinery would be new. If there appear to be no factorsthat indicate there is impairment, the matter does not warrant any modification to theaudit report. Therefore an unmodified report should be issued.

02

d. The refusal from management to send out letters of balance confirmation result in theauditor being unable to obtain sufficient appropriate audit evidence. As per thescenario the trade receivables are the most significant item in the balance sheet; thisimplies the potential effect of the inability to obtain evidence is material. In such asituation, a qualified opinion should be given in the audit report.

02

e. IAS 16 allows both forms of depreciation to be used; the purpose is to allocate the costof asset over its useful life on a systematic basis and in line with the pattern of flow ofeconomic benefits to the entity. In this case there appears to be no material non-compliance with IAS-16. An unmodified report should be issued.

02

Total Marks 10

Ans.2.(a)

1 mark each for definition of Reasonable and Negative Assurance, 1 mark eachfor an example.

04

Reasonable Assurance – a high, but not absolute, level of assurance.

Negative Assurance – assurance given in the form that nothing has come to theattention of auditor that these financial statements do not give true and fair view.

An example of a reasonable assurance engagement can be an audit of financialstatements wherein the auditor expresses an opinion on whether the financialstatements give a true and fair view of the state of the company’s operations.




An example of a negative assurance engagement can be a review of interimfinancial information wherein the reviewer opines that nothing has come to hisattention that causes him to believe that the interim financial information doesnot give a true and fair view of the state of the company’s operations.

(b) Up to 2 marks each for description/identification of the procedures in an auditand a review engagement

04

Reasonable AssuranceProcedures performed can include inquiry, observation, inspection of assets, analyticalreview, re-performance, recalculation and inspection of records.

Negative Assurance

Procedures performed include usually inquiry and analytical procedures.

Total Marks 08

Ans.3.(a)

Up to 2 marks per risk identified per assertion. 08

Risk relating to Inventory

Valuation

1) There is a risk that inventory is not valued according to moving average policyof the Company.

2) Inventory average rate is not updated after every purchase

3) Net realizable value being lower than the calculated cost is not identified incase of finished goods

4) Cost of items are mixed up resulting in incorrect calculation of value

Completeness:

1) Every inventory item relating to the Company is not recorded in the inventorymanagement system.

2) Listing of inventory prepared by the Company is not complete.

Rights and Obligations

1) The inventory items present at year end does not belong to entity.

2) Third party stock present at the premises of the Company may be designatedas Winter fell stock.

Existence

1) Listing of stock prepared by the Company does not actually exists

2) Inventory management system may not be updated after every issuance.




Presentation and Disclosure

1) Disclosure for movement in provision for slow moving stock may not be givenin the financial statements

2) Inventory held by third party may not be disclosed separately.

(b) Up to 1 mark for each internal control appropriately described (controls otherthan the ones stated below can also be awarded marks if relevant to inventoryscenario).

08

Issuances of raw material inventory from store to production factory areauthorized

Purchases made are authorized by company representatives Purchases are only made from authorized vendors Pre-screening of vendors is performed prior to placing them on authorized

vendor list NRV test is performed monthly as part of closing exercise Periodic physical inspections are performed by staff to identify short, excess or

obsolete items Ageing analysis of inventory is generated periodically to take appropriate

business decisions about production, further purchases and sales Outward movements of finished goods are effected through gate passes Gate passes (in and out both) are approved Only authorized representatives of the company are allowed access to store Store records are verified by internal audit department on a periodic basis Inventories held by third parties (if any) are subject to periodic confirmations

Total Marks 16

Ans.4.(a)

Auditor's expert – An individual or organization possessing expertise in a field otherthan accounting or auditing, whose work in that field is used by the auditor to assistthe auditor in obtaining sufficient appropriate audit evidence. An auditor's expert maybe either an auditor's internal expert (who is a partner or staff, including temporarystaff, of the auditor's firm or a network firm), or an auditor's external expert.

Management's expert – An individual or organization possessing expertise in a fieldother than accounting or auditing, whose work in that field is used by the entity toassist the entity in preparing the financial statements.

(b) When determining nature, timing and extent of procedures, an auditor needs toconsider

The nature of the matter to which that expert's work relates; The risks of material misstatement in the matter to which that expert's work

relates; The significance of that expert's work in the context of the audit; The auditor's knowledge of and experience with previous work performed by

that expert; and Whether that expert is subject to the auditor's firm's quality control policies and

procedures.




(c) Generally, the auditor’s report should NOT refer to the work of an expert inunmodified opinion. This is because whilst the expert may be performing his work asper his own standards, the auditor has to provide an independent opinion on the truthand fairness of the Financial Statements.

However, sometimes a situation may arise wherein the audit report has to be qualifiedor modified and the reason for such modification is coming out of the workundertaken by the expert. In such cases a reference would be deemed necessary in theaudit report. If reference is made (due to law enforcement or modification of report) astatement is required that the reference does not reduce auditor’s responsibilities.

Total Marks 12

Ans.5

5 marks for each part; 1 mark for identifying the threat involved, 1 mark fordefining the threat identified, Up to 2 for explaining the threat and linking it tothe scenario, 2 marks for each safeguard given

The threat involved in this scenario is Familiarity threat. Familiarity threat occurswhen, because of close relationships, accountant/auditor may become too sympatheticto the interests of Client (audit client) or officers of the Client.

In this case, Talha and Umer are Childhood friends and neighbors. And Mr. Naeem ulHaq is the father of Umer. There is a risk that Mr. Talha may be over familiar with theCFO of the WCC and may impair his independence.

Safeguards

1) The firm should change the engagement manager deputed for the audit ofWCC

2) If this is identified at a later stage of the audit, Mr. Talha should be removedfrom the audit team and any work done by Mr. Talha should be reviewed byQuality Assurance Partner.

The threat involved in this case is Self-review threat. Self-review threat occurs when aprevious work done or judgment given by an accountant/auditor needs to be re-evaluated by the same accountant/auditor subsequently while providing assurance.

In this case, the firm is asked to prepare fixed asset register for an audit client. There isa risk that audit team will be reviewing the work of its own firm when performingaudit.

Safeguards

1) It is to be noted that since Tirmazi trader (Pvt.) Limited is not a listed client,firm can provide such service to the Client as long the firm deputes separateteam for the preparation of fixed asset register and audit.

2) The two teams should be instructed to not to communicate with each other onthis matter and non-disclosure agreement should be signed by both teams.

3) It should be communicated to the client that primary responsibility for thepreparation and maintenance of fixed asset register rests with the managementof the Company.

Total Marks 10




Ans.6.(a)

Up to 1.5 mark for each point identified in accordance with the documentationrequirement of ISA 320

The auditor shall include in the audit documentation the following amounts and thefactors considered in their determination:

(a) Materiality for the financial statements as a whole

(b) If applicable, the materiality level or levels for particular classes oftransactions, account balances or disclosures ;

(c) Performance materiality and

(d) Any revision of (a)-(c) as the audit proceeds.

(b) Up to one mark for each of the point identified in accordance with requirementof documentation of the audit procedures performed and audit evidence obtained

The auditor shall prepare audit documentation that is sufficient to enable anexperienced auditor, having no previous connection with the audit, to understand:

(a) The nature, timing and extent of the audit procedures performed to complywith the ISAs and applicable legal and regulatory requirements.

(b) The results of the audit procedures performed, and the audit evidence obtained.

(c) Significant matters arising during the audit, the conclusions reached hereon,and significant professional judgments made in reaching those conclusions.

In documenting the nature, timing and extent of audit procedures performed, theauditor shall record:

(a) The identifying characteristics of the specific items or matters tested;

(b) Who performed the audit work and the date such work was completed.

(c) Who reviewed the audit work performed and the date and extent of suchreview?

Total Marks 12

Ans.7.

Up to two marks for each point identified and explained in accordance with ISA-520.

When designing and performing substantive analytical procedures, either alone or incombination with tests of details, as substantive procedures in accordance with ISA330,3 the auditor shall consider:

(a) Suitability: Determine the suitability of particular substantive analyticalprocedures for given assertions, taking account of the assessed risks ofmaterial misstatement and tests of details, if any, for these assertions.

(b) Reliability: Evaluate the reliability of data from which the auditor'sexpectation of recorded amounts or ratios is developed, taking account ofsource, comparability, and nature and relevance of information available,and controls over preparation;




(c) Developing an expectation: Develop an expectation of recorded amountsor ratios and evaluate whether the expectation is sufficiently precise toidentify a misstatement that, individually or when aggregated with othermisstatements, may cause the financial statements to be materiallymisstated.

(d) Further investigation/ Variance threshold: Determine the amount of anydifference of recorded amounts from expected values that is acceptablewithout further investigation.

Total Marks 08

Ans.8.(a)

2 marks for explaining why not conducting stock count is important and whatassertions are not checked/tested, 1 mark for calculating the materiality, 1 markfor alternative procedures, 1 mark for the impact on audit report

05

This is an auditing issue; stock take activity did not take place at year end because theCompany has not made necessary procedures for performing stock count.This means that existence and completeness assertion of the stock could not beverified.

Closing stock balance also has a direct impact of the calculation of cost of sales andprofit before tax.

Materiality: If we use profit before tax (PBT) as a base for planning materiality (PM)and sets the PM at 10% of PBT of Rs. 500 million, then PM amounts to Rs. 50million. Stock amounts to Rs. 300 million which is both material and may bepervasing to the financial statements.

Alternative procedure: Auditor should ask the management to consider performingstock count subsequent to the year-end i.e. 31 December 2015.

Then auditor can work back from the date of stock count to arrive at the position ofstock at 31 December 215.

Impact on Audit Report: If management does not agree to above, the auditor willmodify the audit report by giving disclaimer of opinion as the impact of stock onfinancial statement is both material and pervasive.

(b) 2 marks for explaining why preparing the going concern assumption is not validand its impact on financial statements, 1 mark for alternative procedures, 1 markfor the impact on audit report.

05

In this case, the going concern assumption of the Company is in question.

Financial statements of the client are prepared using going concern assumption. i.e. Itis an accounting issue as the basis of preparation of the financial statement is notcorrect.

Going Concern assumption is that the Company will be able to continue operating fora period of time that is sufficient to carry out its commitments, obligations, objectives,and so on. i.e. the Company will be able to recover its assets and pay its liabilities inan ordinary course of business.




Since, the operating license of the Company is canceled by Court Orders, Companycannot operate in the pharmaceutical market. So the preparation of financialstatements on going concern is not correct.

Materiality: Since going concern assumption is fundamental to the users of financialstatements, the impact of this on financial statements will be both material andpervasive.

Alternative Course of action: The Company should prepare financial statements onother basis. E.g. break up value basis. And fact the Company is not a going concernshall be disclosed in the financial statements.

Impact on Audit Report: If the financial statements have been prepared using thegoing concern basis of accounting but, in the auditor’s judgment, management’s useof the going concern basis of accounting in the preparation of the financial statementsis inappropriate, the auditor shall express an adverse or qualified opinion dependingon whether the impact is material or material and pervasive as well. In the instant case,the matter appears to be more than material as there is a disclosure fundamental tousers’ understanding of the financial statements which is missing. An adverse opinionwould therefore be appropriate.

Total Marks 10

Ans.9.(a)

Up to 2 marks for the definition of subsequent event 02

Events occurring between the date of the financial statements and the date of theauditor's report, and facts that become known to the auditor after the date of theauditor's report

(b) Up to 6 marks for explaining the course of action to take including assessment ofrisk of other undisclosed litigation, Up to 3 marks each for explaining the courseof action If management amends / does not amend the financial statements

12

The partner/audit team has no obligation to perform any audit procedures regardingthe financial statements of light and life Limited Company after the date of theauditor's report.

In this case, the auditor was unaware of the pending legal case at the time of signingof Auditor’s Report. However, the partner of the firm became aware of the litigationbefore financial statements are authorized for issue and became public information.

However, as per ISA 560, if after the date of the auditor's report but before the datethe financial statements are issued, a fact becomes known to the auditor that, had itbeen known to the auditor at the date of the auditor's report, may have caused theauditor to amend the auditor's report, the auditor shall:

1. Discuss the matter with management and, where appropriate, thosecharged with governance.

2. Determine whether the financial statements need amendment and, if so,




3. Inquire how management intends to address the matter in the financialstatements.

Another important matter to consider here is that the management did not disclose thislitigation to the audit team. It needs to be assessed whether this omission wasdeliberate on the part of management or just an oversight. This is because if factorsindicate a deliberate omission, it could be a serious issue and as an auditor we wouldneed to ascertain whether there are any other similar matters that may not have beenpreviously disclosed to us.

Addressing the aforementioned risk could include steps such as requestingmanagement to have the auditor perform extensive procedures on litigation and legalfees, review of publicly available information through external media sources toidentify such cases etc.

Course Of Action If Management Amends The Financial Statements

If management amends the financial statements, the auditor shall:

(a) Carry out the audit procedures necessary in the circumstances on theamendment.

(b) Extend the audit procedures to the date of the new auditor's report; and

(c) Provide a new auditor's report on the amended financial statements. Thenew auditor's report shall not be dated earlier than the date of approvalof the amended financial statements.

Course Of Action If Management Does not Amend The Financial Statements

In this case the auditor's report has already been provided to the entity, if managementdoes not amend the financial statements in circumstances where the auditor believesthey need to be amended then

(a) The auditor shall notify management and, unless all of those chargedwith governance are involved in managing the entity, those chargedwith governance, not to issue the financial statements to third partiesbefore the necessary amendments have been made.

(b) If the financial statements are nevertheless subsequently issued withoutthe necessary amendments, the auditor shall take appropriate action, toseek to prevent reliance on the auditor's report.

Total Marks 14

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